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USD: Range Within a Range Remains While Pressure Builds in the S&P

USD: Range Within a Range Remains While Pressure Builds in the S&P

2018-03-23 14:00:00
James Stanley, Strategist
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Talking Points:

- This week saw the first rate hike from the Federal Reserve in 2018, along with the first press conference from new Fed Chair, Jerome Powell. If one thing was clear, it’s that Mr. Powell is not looking to continue with the same traditions of predecessors Ben Bernanke and Janet Yellen. Thus far, it does not look as though US stocks have been overly-positive that the fast and loose days of old may show up again, as US equities pulled-lower yesterday in the wake of that rate decision. A bit of support has shown in the S&P in the overnight session.

- The US Dollar remains in a range within a longer-term expanding range, making for little fanfare amongst major pairs at the moment. But – Japanese Yen strength has continued to show, likely in response to a continuation of pressure between US/China relations on the topic of tariffs combined with the continued rise in Japanese inflation.

- Next week is the final week of Q1, and this brings both month-end and quarter-end flows. Peculiar things can happen here, so be especially careful with weekend risk as we move towards today’s close. If you’re looking to improve your risk management as part of your approach, check out Traits of Successful Traders research. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

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FOMC Hikes Rates for First Adjustment of 2018 – More on the Way

This was a big week across global markets. We got the Federal Reserve’s first rate hike of the year, we saw a hawkish type of outlay at the Bank of England, and Washington DC remained active, continuing to furnish a series of themes that have shown various stages of pull on market dynamics. But, perhaps the most interesting items of this week weren’t in the headlines at all, and may even go unnoticed by many that don’t live on the charts; and that’s the fact that risk markets continue to pull as if some stressor in the environment looms large with bearish potential. This can be evidenced from the sell-off in US stocks, strength in the Japanese Yen and Swiss Franc and continued malaise around the US Dollar that’s seemingly shown in the face of both bullish and bearish drivers on the currency.

Below, we parse through some of these themes in relevant markets of interest; but before we get there we’re looking at next week’s Economic Calendar, which is rather light all factors considered. March has been a busy month so far, and next week sees the data releases calm; which brings along an excellent time to evaluate price action as this week’s drivers continue to get priced-in across global markets.

DailyFX Economic Calendar, High-Impact Events for Week of March 26, 2018

DailyFX Economic Calendar, Week of March 26 2018 - High Impact Events

Chart prepared by James Stanley

S&P 500 Falls to Fresh March Lows

The sell-off in US stocks deepened on Thursday, continuing the down-side run that started to show around the FOMC rate decision on Wednesday of this week. After a very quick flicker of strength on the initial rate hike announcement, sellers came into the S&P 500 and were able to push prices back down to support as we neared the US equity close. But, as Europe came online yesterday morning, S&P futures began to get hit, and after a quick check of support at 2662, prices broke-down to a fresh March low. A bit of support began to show shortly after the open of the Asian session yesterday but, at this point, that move looks corrective in nature and the door remains open to short-side continuation scenarios.

S&P 500 Hourly Chart: Quick Blip of Strength on FOMC Statement Soundly Reversed

s&p 500 hourly chart

Chart prepared by James Stanley

The big question around the S&P 500 as we move into next week is whether we get a re-test of the February lows. Price action put in a double-bottom around the 2530 level after the February sell-off began to show; and after a 78.6% recovery that topped-out two weeks ago, bearish price action has been on the way back. If we do get a break of the double-bottom formation at 2530, then look out below.

S&P 500 Four-Hour Chart: February/March Recovery Reversed, All Eyes on 2530

s&p 500 four hour chart

Chart prepared by James Stanley

USD/JPY to Fresh 16-Month Lows

We looked at the prospect of a bearish breakout in USD/JPY yesterday, and that began to show up shortly after yesterday’s US equity close. USD/JPY broke below the 105.00 figure, setting that new low at 104.61 and breaching below what’s been a big zone of confluent support. At this stage, prices are rallying off of that new low and testing above 105.00. If we do see resistance around prior support, in the door remains open for bearish continuation.

On that topic – given that this is a Friday and also taken with the fact that next week is the final week of the quarter, strange things might happen here. Month-end flows can bring on peculiar moves, and Quarter-End flows as well: Next week is both of those. For those that are short in the pair, the fact that the breakout hasn’t been able to continue may compel them to close up risk ahead of the weekend. Chasing a breakout on a Friday can be especially dangerous, so for those trading bearish momentum here, risk levels and stops are still of the upmost importance as a squeeze or a rally could really hasten to the upside if short-term resistance levels get taken out.

USD/JPY Four-Hour Chart: Bearish Continuation Potential After Down-Side Breakout of LT Support

Please add a description for the image.

Chart prepared by James Stanley

As mentioned above, this was a longer-term area of support that’s held-up for over a month. This area first started to see tests in mid-February after that longer-running trend-line began to come into play. But as each of those support bounces have grown more meager, sellers finally found the ammunition they needed to begin tipping prices-lower. Below, we’re looking at the weekly chart to help put this move into context.

USD/JPY Weekly Chart: Long-Term Support

usdjpy weekly chart

Chart prepared by James Stanley

US Dollar Range Within Expanding Range Persists

While the US Dollar spent a large chunk of last year selling-off, so far in 2018 matters have been considerably less dramatic, at least if we focus on price action after the January spill in the currency. 2018 opened in the same way that 2017 ended, and that was with bearish run in the Greenback. A longer-term Fibonacci level began to come into play in January, and after another test there in February, we’ve largely held the line.

DXY Weekly Chart: 61.8% Fibonacci Retracement Continues to Hold the Lows

us dollar weekly chart

Chart prepared by James Stanley

February produced a couple of flares of volatility in the Greenback, helping to produce both a higher-high and a lower-low. This type of expanding range will often show ahead of a big move in one direction or the other; but, so far, the US Dollar is trading within an even smaller range inside of that longer-term expanding range.

US Dollar Four-Hour Chart: Horizontal Range Inside of Longer-Term Expanding Range

us dollar four hour chart

Chart prepared by James Stanley

GBP After BoE, UK CPI

Yesterday produced a pretty interesting response in the British Pound. The Bank of England was a bit more hawkish than was expected, as we saw a 7-2 vote to hold rates flat. But, the fact that two voters actually cast a ballot for an immediate rate hike is, in and of itself, a bit surprising. This is regarding a bank that’s appeared reticent to make any changes at a meeting that wasn’t a Super Thursday, and this even includes the immediate aftermath of the Brexit referendum when the bank had forecast the possibility of doom-and-gloom after the vote.

Yesterday’s 7-2 split helped to bring a quick spike of strength into GBP, but that couldn’t last. In short order, prices had moved down towards the support zone that we were following at 1.4070, and have since rallied back towards prior resistance.

GBP/USD Four-Hour Chart: Rip-and-Dip on BoE, Short-Term Strength Continues Beyond Retracement TL

Please add a description for the image.

Chart prepared by James Stanley

GBP/USD remains extremely interesting for a few reasons: UK Inflation is brisk and well-above the BoE’s target. The February print came-in at 2.7% this week and while disappointing the expectation and coming-in below the 3% prints that we’ve become accustomed to, this is still well-elevated beyond the bank’s 2% target. Yesterday opened the door for May, and that’s interesting: But perhaps more proactive is the rest of the year. As in, are we to imagine that one 25 basis point adjustment will get inflation back-below 2%?

This can help to bring strength into the British Pound as this theme gets priced-in, and if this is combined with a continuation of weakness in the US Dollar, the topside of GBP/USD remains very interesting for longer-term plays.

GBP/USD Daily Chart: Brexit Recovery Continues as Last Week’s Bullish Breakout Drives-Higher

gbpusd daily chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on Gold prices? Our DailyFX Forecasts for Q1 have a section specifically for Gold. We also offer a plethora of resources on our Gold page, and traders can stay up with near-term positioning via our IG Client Sentiment Indicator.

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If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

--- Written by James Stanley, Strategist for DailyFX.com

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